Saizen Reit

AmFraser Research, Aug 26

SAIZEN's gross revenue and net property income increased by 9.7 per cent and 13.6 per cent, respectively, in FY2013, largely supported by its acquisitions of seven properties. For the six months ending June 30, 2013, Saizen declared a distribution per unit (DPU) of 0.63 cents, amounting to a full-year DPU of 1.29 cents. This is marginally higher than our projected FY2013 DPU of 1.24 cents.

In FY2013, overall rental reversions of new contracts were marginally lower by about 0.5 per cent. This marks an improvement from rental reversions witnessed in FY2012, during which rental reversions were lower by 2.1 per cent. Given our cautiously optimistic outlook on the Japanese residential market, we maintain our assumption of flat rental reversions across Saizen's portfolio.

FY2014 will witness the full-year contribution of Saizen's recently acquired properties. Sitting on a cash pile of six billion yen (S$78 million), Saizen could tap on its cash balance to engage in immediately yield-accretive acquisitions. Moreover, Saizen has unencumbered properties valued at two billion yen, further strengthening its financial clout. We are currently pencilling in 2.3 billion yen of acquisitions at a 6 per cent NPI yield.

To provide its unitholders with greater visibility on distributions, Saizen has entered into hedging transactions for its upcoming distributions. The distribution payment for the period ended June 30 has been hedged at an average rate of 75.12 yen per S$ and the subsequent distribution is hedged at an average rate of 81.15 yen per S$, which compares unfavourably with the current rate of 77.14 yen per S$. This would inevitably weigh on Saizen's FY2014 DPU in S$ terms.

While we expect Saizen's H1 2014 DPU to grow by 2.8 per cent y-o-y in yen terms, this will be offset by a 8.2 per cent increase in the hedged rate. We currently project Saizen's H1 2014 DPU at 0.63 cents, that is 4.5 per cent lower than H1 2013 DPU.

Accompanying its latest results, Saizen proposed a unit consolidation involving the consolidation of every five existing units in Saizen Reit held by unitholders into one unit, subject to regulatory and unitholder approvals. The motivation behind such a proposed move is to reduce the magnitude of a single tick move on Saizen's share price, and thus its perceived volatility. The share consolidation is expected to be completed in November 2013.

We roll over our estimates and lower our target price to S$0.195 on the back of a higher riskfree rate of 2.7 per cent, implying a capital upside of only 6 per cent. In our opinion, Saizen's current yield level of 7 per cent, which translates into approximately 430 basis points over the risk-free rate, does not yet sufficiently compensate investors for the inherent macro, forex and interest rate risks. Maintain "hold".

HOLD